Ever been frustrated with the loan process, minutiae, and delays? Ever lost a good real estate deal because you were unable to secure a loan? Wouldn't it be nice if you got to be your own banker? You can, with infinite banking.
If you've never heard of the infinite banking concept, it's an intriguing approach to banking and lending where you get to decide whether to loan yourself money as needed from a whole life insurance policy rather than being subject to the will of a bank employee behind a desk. While it is obviously an exciting, interesting concept for a real estate investor, there's plenty to learn about what infinite banking is before you decide whether it is a good idea for you or your real estate investing business.
What is infinite banking?
The infinite banking strategy was formulated by Nelson Nash, a life insurance agent for 35 years, and author of Becoming Your Own Banker. The premise is that you use your whole life insurance policy to lend money to yourself using the cash value of your policy as collateral so that you're able to grow your wealth more efficiently than by using third-party lenders.
If the appropriate policy is selected (not a term life policy), all the policy owner has to do is call the life insurance company and get a policy loan. There are no stipulations on what it can be used for nor other typical loan terms, aside from interest. Typically it charges a lower interest rate than a traditional bank loan, but the exact rate will be determined by a number of factors. It's touted as being much easier and faster than a traditional loan process, especially for an unconventional investment.
How is infinite banking used?
A whole life insurance policy, also known as permanent life insurance, is not meant to be used strictly as a death benefit for family; it's intended to be used throughout the life of the policy holder as well. So if you're out of a job or on disability, need a new car, or want to fund a down payment or purchase a home outright, all you need to do is take out a loan against the cash value of your policy. This approach can significantly increase your liquidity because you are able to quickly and easily tap into the equity of your policy as needed.
To be clear, simply having a life insurance policy does not mean you are utilizing the infinite banking system. However, you are able to if you choose to do so as an added function to the standard life insurance policy benefits. Think of it as a tool within your toolbox, not the toolbox itself.
Some find it easier to visualize the cash surrender value as a savings account. The account will, in fact, earn guaranteed interest, and if you select a participating life insurance policy, you will also receive dividends into your account continually, helping your cash value to grow in addition to your premium dollars. The cash value is what you're able to take your policy loan from, which can be utilized as needed to cover unexpected expenses or to help generate passive income and, ideally, achieve financial freedom.
Who does infinite banking work for?
To utilize an infinite banking concept, you must have a whole life insurance policy. Not everyone will be able to obtain one, and even if you can, the monthly premium payment is typically fairly substantial, at around 10% of your income.
Before even considering this, you'll need to have a meaningful, dependable income stream and a solid understanding of money, loans, banking, and investing -- or you could end up in a position of overextending yourself.
This banking concept is ideal for the business owner or real estate investor who is looking to grow their business. It's also helpful if you are someone who already maxes out your Roth IRA contributions on a regular basis, because this can be a way for you to grow your wealth tax-deferred.
There are skeptics who think the infinite banking system is a scam. But whole life insurance is considered a tier 1 asset by the traditional banking system. Using whole life insurance as a banking function was an entire course at the Wharton School of Business, and some of the world's wealthiest individuals have used it to create generational wealth. The “infinite banking” moniker is just a marketing name Nash created to popularize this banking concept; it has been used since these life insurance policies were first offered.
The Millionacres bottom line
While not a widely utilized tool today, it is a perfectly legal, sound method of banking that has been used since the 1800s. The infinite banking concept simply allows you to take control of your personal finance needs and can allow you to retain cash in your account that would otherwise be paid to a third party, growing your cash value over time. If a whole life insurance policy can work for you, then so can infinite banking.